S7 Ep11: Weder di Mauro: What went wrong at Credit Suisse

Episode Summary

Executive Summary: The episode revisits Credit Suisse’s 2023 collapse and argues it was less a capital failure than a collapse of trust and business-model credibility. Beatrice Veda Di Mairo explains that while post-Lehman regulation helped preserve capital buffers, supervisors still need broader, earlier intervention tools, plus better cross-border resolution and funding arrangements to prevent contagion.

Main Topics: Why Credit Suisse was considered too big to fail (Priority: 5/5): The discussion frames the bank within the post-Lehman global resolution regime designed to ensure no major bank can bring down the financial system through disorderly failure. What actually drove the collapse (Priority: 5/5): Credit Suisse had years of scandals, falling market valuation, and worsening confidence; the crisis became acute in October 2023 when wealthy clients began withdrawing deposits, triggering a broader run. Resolution weekend and options considered (Priority: 5/5): Authorities weighed state takeover, UBS acquisition, and a formal bail-in before choosing the UBS rescue as the fastest way to stop contagion. What worked in the Swiss regime (Priority: 4/5): The AT1/structured-capital mechanism functioned as intended in allowing the rescue and supporting resolution, even if the full bail-in framework was not tested. What did not work or remains incomplete (Priority: 5/5): Cross-border legal uncertainty, especially around exemptions and the need for liquidity in resolution, showed that the international framework remains incomplete. Regulatory lessons for the future (Priority: 5/5): The episode suggests supervisors should look beyond capital ratios to forward-looking indicators of trust, profitability, franchise value, and market signals, and intervene earlier when problems emerge.

Key Arguments: Credit Suisse was not primarily a capital-shortage case; it had regulatory capital and liquidity, but its business model and franchise value were no longer credible. The bank run started with wealthy clients in Asia and rapidly broadened, showing how confidence can unravel a seemingly solvent bank. Post-2008 reforms built much larger capital cushions, which were useful during Covid, but regulators focused too narrowly on solvency metrics and not enough on broader signs of distress. A formal bail-in of AT1s and other loss-absorbing debt could have been executed, but the authorities chose UBS’s takeover because it was the most reliable way to stop contagion immediately. The Swiss response was successful for financial stability because the run stopped and contagion was contained, even though the planned regime was not fully exercised. Cross-border resolution still depends on foreign legal exemptions and coordination, so global authorities need more robust pre-agreed mechanisms for future failures.

Data Points: Time since Credit Suisse collapse: 12 months / one year on - Episode revisits the bank’s demise a year later Deposit outflow: 80 billion - Credit Suisse lost deposits during the October 2023 run AT1 / additional loss-absorbing capital at failure: almost 100 billion - Total loss-absorbing capital available at Credit Suisse Risk-weighted balance sheet size: 250 billion - Referenced as the bank’s risk-weighted balance-sheet figure Unweighted balance sheet size: 500 billion - Alternative non-risk-weighted balance-sheet reference Bail-in amount that would have been activated: 45 billion - Additional bail-in bonds that were not ultimately triggered Public liquidity backstop: up to 180 billion - Liquidity provided by the Swiss National Bank during resolution Swiss GDP: about 700 - Used to emphasize the scale of the 180 billion liquidity backstop Years since Lehman Brothers: around 15 years - Used to explain the evolution of the too-big-to-fail framework Expert hearings: 15–20 hearings - Beatrice’s task force consulted supervisors, market participants, and others Share price decline: price to book values falling by some 90% - Illustrates prolonged market deterioration before collapse Regulatory threshold mentioned: 7% - AT1 dual trigger could have been activated if capital fell below this level

Pivotal Quotes: "The capital was there, but the business model was no longer credible." — Beatrice Veda Di Mairo: Explaining why Credit Suisse could be run despite meeting capital and liquidity requirements "soundness and trust should not only be defined in terms of capital ratios" — Beatrice Veda Di Mairo: Her core regulatory lesson from the collapse "we need funding a resolution" — Beatrice Veda Di Mairo: Describing the unresolved need for liquidity support in bank resolution, especially in Europe

Implications: Listeners should take away that bank safety depends on trust, liquidity, and cross-border resolution readiness—not just capital ratios. The case strengthens the argument for earlier supervisory intervention and international agreement on bail-in and funding tools.